New Fed chair, in public debut, vows to prevent ‘overheated’ U.S. economy

WASHINGTON — Jerome Powell, the new chair of the Federal Reserve, made his debut public appearance telling the House Financial Services Committee that he is committed to “clearly explaining” Fed thinking.

Powell said on Tuesday the U.S. economy is doing well and the recent stock market jitters don’t worry him, saying the Fed intends to hike interest rates at a slow and steady pace — similar to its moves under his predecessor, Janet Yellen.

Powell has one of the more difficult jobs in Washington right now. He has to keep Wall Street calm, unemployment low and inflation in check — all while facing pressure from President Trump. While the Fed is an independent entity over which Trump has no direct control, Powell is a Trump nominee and the president has made it clear he wants faster economic growth and a booming stock market.

In his first public testimony, Powell tried to reassure America he can walk that line between letting growth pick up after the Trump tax cuts, but not letting the economy get so hot that there’s danger of a crash.

“The [Fed] will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 per cent on a sustained basis,” Powell said. “Further gradual increases in the federal funds rate will best promote attainment of both of our objectives.”

His remarks suggest he still thinks the Fed should hike interest rates three times in 2018. Wall Street traders and economists are overwhelmingly predicting a rate hike at the Fed’s next meeting on March 21.

By raising interest rates, the Fed looks to cool the economy and ward off inflation, and investors are listening carefully for any signs that Powell intends to pick up the pace of rate hikes.

There’s a growing worry that the economy could overheat after the tax cuts and the massive boost in government spending that Congress just approved. Billionaire hedge fund manager Ray Dalio, who correctly predicted the financial crisis, now sees a 70-per-cent chance of a recession before the 2020 presidential election.

“Powell’s going to err on the side of caution,” said Joseph LaVorgna, chief economist at investment bank Natixis. “It would be a mistake to hint at four rates hikes this year. If the Fed did four hikes, the yield curve would likely invert, and that would send an ominous sign.”

Fears of the economy and inflation getting out of control triggered the stock market selloff in early February. The Dow

fell an ominous 666 points on the final day of former Fed chair Yellen’s tenure, and it sunk nearly 1,200 points — the biggest single day point drop in market history — on Powell’s first official day on February 5. But it has since regained most of the losses.

Wall Street often tests new Fed chairs with market drops, and Powell, a lawyer and former private equity executive, wants to show he can handle the job that has typically been held by PhD economists. He shrugged off the recent declines as typical market behaviour that has little to no impact on the wider economy.

“At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labour market, and inflation,” Powell said, adding that he likes having clear guideposts for what the Fed wants to see before it hikes rates. “Personally, I find these rule prescriptions helpful.”

Powell remains upbeat about the U.S. economy overall. In a seeming nod to Trump, the Fed chair noted the economy expanded “about 3 per cent” (Trump’s goal) in the second half of 2017 and that businesses are starting to spend more on new factories, equipment and technology.

“Growth in business investment stepped up sharply last year, which should support higher productivity growth in time,” he said.

While he didn’t explicitly mention the tax cuts, he characterized a growing economy with inflation likely to “move up this year and stabilize” around the Fed’s 2 per cent target.

“Powell won’t utter the word ’Goldilocks’ but we will,” said Greg Valliere, chief global strategist at Horizon Investments.

The president nominated Powell, a Republican with a reputation in Washington as a consensus builder, with the hope that the new Fed chair would keep interest rates low so economic growth would pick up. Trump’s team forecasts 3 per cent growth every year for the next decade, a feat few economists believe will happen.

But it’s possible growth could hit 3 per cent in 2018. The Fed currently predicts 2.5 per cent growth this year, but that forecast was done before the final passage of the tax bill and the increase in spending that Congress approved.

“We think the Fed will raise its 2018 GDP forecast to something close to 3 per cent, despite a worrisome spike of consumer debt levels,” predicts Valliere.

In December, the Fed projected three rate hikes this year, but just over a quarter of economists now predict the Fed will end up doing four (or more) increases this year.

Powell’s biggest problem is that he’s starting his job shortstaffed. Only three of the seven Fed governor positions are currently filled, meaning Powell has a diminished team at a time when the Fed needs to be watching many areas of markets and the economy. Trump nominated one other person — economist Marvin Goodfriend — to serve as a Fed governor, but the Senate is on the fence about confirming him. All the Democrats on the Senate Banking Committee voted against Goodfriend on the day his nomination came up for a vote in committee. Senator Rand Paul, R-Ky., has also said he’ll vote against Goodfriend. The Fed still lacks a vice chair because Trump has yet to nominate anyone.